D104 Intermediate Accounting II - Set 3 - Part 2

Correct Answer: (Net income + Interest expense + Income tax expense) / Interest expense

The times interest earned ratio measures a companys ability to cover interest expenses with its earnings before interest and taxes (EBIT).

Correct Answer: Debit treasury stock, credit cash

The acquisition of treasury stock is recorded by debiting the treasury stock account and crediting cash for the amount paid.

Correct Answer: The issuer can repay the bonds before maturity

Callable bonds give the issuer the option to repay the bonds before the maturity date, typically at a premium.

Correct Answer: Decreases interest expense

Amortizing bond premium decreases interest expense because the premium reduces the amount of interest the company needs to pay over the life of the bond.

Correct Answer: Recognized when probable and reasonably estimable

Contingent liabilities are recognized in financial statements if they are both probable and the amount can be reasonably estimated.

Correct Answer: Retirement of treasury stock

When treasury stock is retired, the paid-in capital associated with the stock is reduced because the shares are removed from circulation.

Correct Answer: Decreases retained earnings

Stock dividends reduce retained earnings because they represent a distribution of additional shares to shareholders, reducing the companys accumulated profits.

Correct Answer: Liquidity

The acid-test ratio measures a companys ability to cover its short-term liabilities with its most liquid assets, excluding inventory.

Correct Answer: Tested for impairment annually

Goodwill is not amortized, but it must be tested annually for impairment to ensure its carrying value is recoverable.

Correct Answer: Expense over the service period

Stock-based compensation is recognized as an expense over the service period during which employees provide the services in exchange for stock options.

Correct Answer: Common stockholders' equity / shares outstanding

Book value per share is calculated by dividing common stockholders' equity by the number of outstanding shares of common stock.

Correct Answer: Double-declining balance method

The double-declining balance method is an accelerated depreciation method that results in higher depreciation expenses in the early years of an asset's life.

Correct Answer: Debit bonds payable, credit cash and gain on bond redemption

When bonds are reacquired at a price less than the carrying amount, a gain is recorded as the difference between the carrying value and the reacquisition price.

Correct Answer: Net income / average common stockholders' equity

Return on equity measures the profitability of a company relative to the equity invested by common stockholders.

Correct Answer: Recorded as a liability

Gift certificates that have been sold but not yet redeemed are recorded as a liability (unearned revenue) until the certificate is used.

Correct Answer: Interest expense increases over time

Under the effective-interest method, interest expense increases over time as the discount is amortized, increasing the carrying value of the bond.

Correct Answer: Debit bonds payable, debit loss on bond redemption, credit cash

When bonds are redeemed at a price higher than the carrying value, the company debits the bond payable and loss on redemption accounts and credits cash.

Correct Answer: Decreases retained earnings

Stock dividends reduce retained earnings because they represent a distribution of additional shares from retained earnings to shareholders.

Correct Answer: Debit retained earnings, credit treasury stock

A loss on the sale of treasury stock is debited to retained earnings if there is no balance in the paid-in capital account for treasury stock transactions.

Correct Answer: Double-declining balance method

The double-declining balance method results in decreasing depreciation expenses each year, as the book value of the asset decreases.